The FSA has published a summary of a speech made by Ken Hogg, Director of the FSA’s insurance sector, at the insurance sector conference on 18 March 2010. In his speech, Ken Hogg discussed the recent publication by the FSA of its Financial Risk Outlook, and Sector Digests, which give extra focus to the risks specific to each financial sector. The purpose of Hogg’s speech was to highlight the key insurance risks from these reports and to explore a few of the steps which insurers could take to mitigate these risks.
The first set of risks which Ken Hogg discussed relate to capital and solvency, together with the different impact of these issues on the life and non-life sectors during the recent economic downturn. Commenting on these risks, Hogg highlighted that:
“Firstly, it’s about monitoring your solvency position. Conditions can change very quickly and being slow to realise what’s happening and slow to respond could make a big difference to both the capital conserving options available and the opportunity cost – to shareholders and policyholders – of taking those actions….regular and ongoing stress testing is an important part of planning ahead.
Secondly, you need to exercise care in the valuation of assets and liabilities, and ensure they are appropriately matched by duration. Annuity providers in particular remain exposed to renewed widening of bond spreads”.
The second set of risks highlighted by Ken Hogg related to consumers’ behaviour, including changes to consumer demand and the propensity for increases in claims, and the different issues which will effect the life and non-life insurance sectors as a consequence.
Ken Hogg ended his speech by exploring the risks associated with the high level of change and uncertainty in the current regulatory environment and noted that a considerable number of policy changes, such as the Retail Distribution Review, pension reform under the National Employment Savings Trust, and Solvency II, aim to be implemented in 2012.